Inheritance Tax and CGT question...

[Robert may]

Hi, this is a very informative site and i was hoping someone could help advise or has experience with the following:-

My parents own 3 properties.

1 is their residence, the other 2 are rented out and produce a small profit rent ie have mortgages secured on them, one has 30% debt the other about 70%.

All 3 are worth in the region of say 800k each. The two that are rented out have been converted to 4 flats in each property.

We are thinking of transferring the ownership to me of the 2 that are rented out and using the 7 year rule to mitigate IHT.

The question is, do i have to pay CGT if i were to inherit the 2 rented out properties?


I have done a bit of reading on this but its unclear.


Any advice appreciated.


Many thanks in advance

[jim_price]

Sounds to me as if you should be seeking professional advice from a capital taxes expert. With the numbers you are taking about a poorly devised or executed strategy could end up being very costly.

If these properties are gifted to you, it is the donor who is responsible for the CGT not the donee, although it is possible to effectively transfer any gain from donor to donee using holdover relief. Claims, reliefs and exemptions will all influence the extent of the CGT problem.

If you need a recommendation for a tax practitioner I can provide one.

[Robert may]

Hi Jim and many thanks.

I dont see it as that complicated really ... Probably my fault for complicating the issue :)

As a ball park what are the CGT implications of recieving 2 properties from parents seeking to mitigate IHT.

Thats it really.... Sorry to have confused you

[jim_price]

Robert, property transferred to you from parents will be deemed to have been at market value even if the actual value was nil.

Your parents will therefore presumably be looking at a capital gain (I am assuming the properties have appreciated in value since purchased). The extent of the gain will depend on current market value, purchase price, date of purchase (possibly), whether they lived there (and for how long), lettings relief, availability of capital losses, and availability of CGT annual exemption. There may be further factors but that's a start.

As I say, I would encourage you to consult a tax professional.

[Robert may]

Hi Jim, understood and many thanks :)

[nasirs]

Please do not count me on this as I am not a qualified tax advisor but have a decent knowledge about taxes.

I dont think your parents/you would need to pay any CGT or IHT using th 7 years rule. I am sure you are aware if your parents gift you the property and stay alive for 7 years, which I hopethey will the there will be no IHT.

Also you should also look into Gift relief that might include some payment to your parents but it could atleast reduce your parens CGT liability to nill. There is some complicated calculations involve.

The best is it if you consult a tax advisor that could save you good amount of money.

[langweishan]

Thanks to share this information.

[Davem1234]

As this post is getting a bit contradictory, I need to clear up a couple of things.

The gift of the properties will create a capital gain on your parents based on the market value of the properties. However if both you and your parents agree, this gain can be "held-over" until the properties are sold to a third party (the tax office will need to be advised of this decision). In other words the gain to date plus the gain until the future sale will be assessed on yourself at that later date and no tax will be due now.

From an inheritance tax point of view, the properties will not fall into the parents' estates as long as they both survive 7 years. Should one die before then, part or all of the value of the gift will be added to the estate.

I hope this helps.

Dave

[David Griffiths]

But the hold over relief for gifts only applies to the gift of business assets - assets used in a trade or vocation carried on by the donor. I don't believe that rental properties qualify for this relief.

There used to be a general holdover relief for gifts, but that was abolished some years back - so far back that I've not been able to find the date.

Nothing in my current reference material suggests that it's been reintroduced, and there's a list of qualifying assets on page 2 of this HMRC helpsheet (http://www.hmrc.gov.uk/helpsheets/hs295.pdf)

[Maslins]

Agree with David Griffiths. There is an exemption to CGT under certain circumstances where the (non-business) asset is put into trust, but this is only really because putting it into a trust typically leads to an immediate inheritance tax charge ("chargeable lifetime transfer" rather than a "potentially exempt transfer").

If they give you a residential rental property, they will get hit for CGT, but as mentioned by Jim Price above, this can be reduced by a multitude of things.

[RAL]

I agree with David and Chris

But the hold over relief for gifts only applies to the gift of business assets - assets used in a trade or vocation carried on by the donor. I don't believe that rental properties qualify for this relief.


Available under S165 of Capitla Gains Act 1965


There used to be a general holdover relief for gifts, but that was abolished some years back - so far back that I've not been able to find the date.


This general relief was abolished by FA 1089 for disposals on or after 14 March 1989.


There is an exemption to CGT under certain circumstances where the (non-business) asset is put into trust, but this is only really because putting it into a trust typically leads to an immediate inheritance tax charge ("chargeable lifetime transfer" rather than a "potentially exempt transfer").


Available under S260 of TCGA 1965.

[Davem1234]

Apologies all round, yes hold over relief is just for business assets ... please ignore my incorrect advice.

Just been dealing with hold over relief for client who is gifting business assets so it is applicable in that case!!!

[jim_price]

Like Dave I think I had holdover relief on the brain - of course gift relief hasn't been available for a while now.

[RAL]

There are couple of typo errors in my post.:redface::mad:

It should read
1. Capital Gains Tax 1965
2. FA 1989 not FA 1089 :redface:

[Sanjay Kachhela]

I am a tax specialist and can advise you. In short there will be CGT implications for your parents and NO holdover will be available.

There is another idea where they keep the income but the capital value is removed from the estate. This is high level planning but then again we are talking numbers that fit.

Sanjay

[Robert may]

Many thanks for all the help so far ....

What happens if they cant afford to be hit with the CGT on the gift day one ?

It seems to me to be looking like a hefty bill to pay as appears from what’s been said it can’t be passed on to the beneficiary of the gift until he/she disposes of the asset.

I assume if they cant afford the CGT it stops them using this method to mitigate IHT?

[Sanjay Kachhela]

Ther is a way to mitigate the CGT, but specialist advice will be needed. Please contact me to discuss if you would like a solution.